CalPERS ‘victory’ a warning to uppity cities

A San Bernardino sign on I-10 East is seen on Wednesday, July 11, 2012 in San Bernardino, Calif. The San Bernardino city council voted Tuesday night in favor of the city filing for bankruptcy. (AP Photo/Grant Hindsley)

/ AP

A San Bernardino sign on I-10 East is seen on Wednesday, July 11, 2012 in San Bernardino, Calif. The San Bernardino city council voted Tuesday night in favor of the city filing for bankruptcy. (AP Photo/Grant Hindsley)

A San Bernardino sign on I-10 East is seen on Wednesday, July 11, 2012 in San Bernardino, Calif. The San Bernardino city council voted Tuesday night in favor of the city filing for bankruptcy. (AP Photo/Grant Hindsley) (/ AP)

The nation’s largest pension fund, the California Public Employees’ Retirement System, has racked up another victory in its effort to halt any effort by municipalities to get out from under their crushing pension obligations.

Last month, CalPERS and the bankrupt city of San Bernardino agreed to a still-confidential deal that will require San Bernardino to begin making back payments. In 2012, the impoverished Inland-Empire city 110 miles north of San Diego filed for Chapter 9 bankruptcy after facing a budget deficit of almost $50 million. It became Ground Zero in a fight of statewide importance.

Unlike the two other recently bankrupt northern California cities, Vallejo and Stockton, San Bernardino tried to treat CalPERS like any other creditor and stopped making its contributions to pay for its workers’ pensions. CalPERS then used its formidable resources to challenge the bankruptcy in federal court, lest it set a precedent.

San Bernardino officials relented and began last year making its payments to CalPERS, but resisted making missed payments. This deal reportedly provides a payment schedule for San Bernardino to make good on the $16.5 million it owes to CalPERS. This is troubling news for any Californian who is not vested in a public pension system — more evidence that even in bankruptcy cities will not be able to reasonably trim their pension costs.

Most solvent California cities are being hit with large contribution-rate increases to make up for CalPERS’ inadequate investment performance (and to pay for large increases in benefit promises over the last decade or so).

As a result, more cities may face what is known as “service insolvency.” Such cities aren’t insolvent per se, but they cannot provide an adequate level of public services because of their enormous compensation costs. They pay their employees and provide pensions, but can do little beyond that.

CalPERS’ position, backed so far by the courts, is that once a city council grants a pension increase to a public employee that new benefit level must be paid for the life of the employee and spouse no matter what happens to the municipality’s budget. In the private sector, employers often trim benefits going forward. That can’t be done in California’s public sector.

That situation left some pension reformers thinking that cities could at least get out from under these pension debts if they go belly up. But Vallejo’s and Stockton’s officials came up with bankruptcy exit plans that increased taxes and cut services, staffing levels and some forms of compensation — but that leaves the promised pension benefits untouched.

San Bernardino was the outlier, in that it tried to put pensions on the table. But now that it, too, has buckled, we won’t get to see whether California pensions can be slashed when a city can’t pay its bills. CalPERS argues that California’s law is different from Michigan’s, home of the nation’s largest bankrupt city of Detroit. There, a judge is allowing pension benefits to be slashed given that the Motor City is out of money.

In 1999, CalPERS promised the California Legislature that it could pass a law providing large retroactive pension increases and it wouldn’t cost the taxpayers anything. Now CalPERS is telling cities that they must make these full payments no matter what — even as they devour their budgets.

Something has to give. Now that San Bernardino has given in, that “something” will be those taxpayers who pay for and receive city services. The pension debate will have to wait for another day — or another bankrupt city.